Antitrust in focus - April 2020
04 May 2020
This newsletter is our take on the antitrust developments we think are most interesting to your business. François Renard, partner based in Hong Kong, is our editor for this edition. He has selected:
- Covid-19 impact continues to bite
- ECJ tightens the conditions for finding "by object" antitrust infringements
- Bolstered Hong Kong leniency programme designed to encourage cartel reporting by firms and individuals
- New Vietnamese merger control regime to finally take effect
- Thailand sees a surge in antitrust enforcement
- Complex drinks merger secures Australian conditional clearance
- French Competition Authority polices antitrust commitments in gambling sector
- Conditional merger clearances in Mainland China show a focus on behavioural (FRAND) commitments in technology markets
- Sabre/Farelogix clears U.S. merger control hurdle to fall in the UK
Last month we reported on the reaction of antitrust authorities to Covid-19. April has seen a continued proliferation of relevant rule changes, statements, guidance and cases from around the world, impacting merger control, antitrust enforcement, foreign investment control and, in the EU, State aid.
Merger control – failing firm arguments
Uncertainty associated with disruption and delay to merger control processes has been a recurring theme – the European Commission is just one authority continuing to face difficulties in gathering information on which to make its assessments. But this month we have also begun to see the impact of the pandemic on authorities' substantive analysis.
Significantly, during a phase 2 review, the UK's Competition and Markets Authority (CMA) has provisionally cleared Amazon's acquisition of certain rights and a minority shareholding in online restaurant delivery service Deliveroo on 'exiting firm' grounds. On the basis of evidence from Deliveroo's financial advisers that the company has been struggling to prevent a significant decline in revenues since the UK ‘lockdown’ closed a large number of key restaurants, the CMA considers that it would fail financially without the Amazon investment. The CMA also considers that there is no alternative funding available, and that Deliveroo's exit would be worse for consumers than allowing the transaction to proceed. In addition, this month the Korea Fair Trade Commission (KFTC) unconditionally cleared the acquisition by Jeju Air, Korea's largest low-cost carrier, of Eastar Jet, Korea's fifth largest low-cost carrier, after concluding that Eastar Jet qualified as a failing firm. While Eastar Jet had been suffering significant losses before the Covid-19 outbreak, the KFTC specifically pointed to the pandemic and its effect on the carrier's business in its clearance decision. It also reviewed the deal quickly and proposes expediting merger reviews of all industries like the aviation sector which have been hard-hit by the Covid-19 crisis.
As the economic impact of the Covid-19 pandemic bites, we may well see more 'failing' and 'flailing' firm or division arguments being used to justify otherwise potentially anti-competitive mergers in the coming months. However, we also expect antitrust authorities to maintain a strict approach to such assessments, demanding a significant amount of compelling evidence on the impact of Covid-19 on competition in each case. It is clear from the CMA's recent 'refresher' on the subject that, to protect the interests of consumers in the longer term, it will not relax standards of review and will continue to ensure its decisions are supported by a material body of probative evidence rather than mere speculation. For more updates from across the globe, see our global merger review update.
Antitrust enforcement – allowing for cooperation
In terms of antitrust enforcement, the authorities have most visibly been tackling the tricky area of collaboration between competitors, through the publication of guidance and/or exemptions. Some key examples:
- Early this month the European Commission issued guidance (a so-called temporary framework) on allowing limited cooperation among businesses. This will remain in force until further notice, and while it applies primarily to medicines and medical equipment it could also be relevant to essential goods and services outside the health sector. In addition, the Commission confirmed that it will "exceptionally" provide market players with written comfort on their arrangements. Italy has issued similar guidance. The Commission accompanied the temporary framework with an announcement that it has provided a comfort letter to Medicines for Europe, a specific voluntary cooperation project among generic pharmaceutical producers that targets the risk of shortages of critical hospital medicines for the treatment of coronavirus patients.
- In the U.S., the Federal Trade Commission and Department of Justice (DOJ) have put in place an expedited procedure for providing guidance on the legality of collaborative activities aimed at resolving Covid-19-related public health and safety issues. Shortly after, the DOJ announced it would not challenge efforts of medical supplies distributors to collaborate as part of a federal program to distribute supplies.
- The Australian Competition and Consumer Commission (ACCC) has been taking a flexible approach, promptly granting a number of interim authorisations covering information exchange and coordination that have net public benefits, while imposing conditions that provide the ACCC with an active and ongoing monitoring and oversight role. The ACCC has been notified of such proposed collaborations and granted interim authorisations in sectors as diverse as telecoms, ports, energy, medicines, hospitals, health insurance, lending, shopping centres and retail.
- The Hong Kong Competition Commission too recognises that there could be a need for additional temporary cooperation between businesses in certain industries, particularly to maintain the supply of essential goods and services to consumers. It is open to informally engaging, on an expedited basis, with businesses proposing temporary cooperative measures which are "genuinely necessitated" by the Covid-19 outbreak and in the interests of Hong Kong consumers and society.
It is clear, however, that authorities will only tolerate cooperation that aims to overcome the crisis to the ultimate benefit of consumers – any collaboration or other anti-competitive conduct that takes advantage of the crisis is likely to be pursued and heavily disciplined. We are closely monitoring developments: see our global application of antitrust rules overview.
Foreign investment control – protecting national interests
In some jurisdictions, foreign investment control has been a priority with rules adapted to curb opportunistic acquisitions during the pandemic. Canada, for example, has issued a policy statement under which certain investments – broadly “related to public health or involved in the supply of critical goods and services to Canadians or to the Government” – by non-Canadians in Canadian businesses and entities, and the establishment of new Canadian businesses and entities, will be subject to enhanced government scrutiny. The policy also sets out bolstered measures applicable to investments made by state-owned enterprises or investors working under the influence or direction of a foreign government. And India now requires prior government approval of all transactions by investors from nations bordering the country – including where the beneficial owner of the investment is from a neighbouring country and where a non-Indian target has an Indian subsidiary – whatever the sector. Keep up-to-date with our global application of foreign investment control rules tracker.
State aid – approvals and adapting rules
Finally, in the EU, the Commission has kept its promise to respond rapidly to Member States' requests for approval of State aid measures. To date it has cleared over 80 Covid-19-related schemes covering a wide geographical spread of Member States, most in a matter of days. As anticipated, it has also sought to adapt the State aid rules to deal with new concerns and developing issues – its 19 March 2020 Temporary Framework for State aid measures to support the EU economy during the Covid-19 outbreak, which provides detailed guidance on aid measures that can be taken by EU Member States, was extended on 3 April 2020 to cover additional measures and the Commission is currently considering allowing Member States to provide further support to undertakings in the form of equity or hybrid capital instruments (and reportedly also subordinated loans). See our overview of European Commission State aid decisions and our alert on the Temporary Framework for further details.
The European Court of Justice (ECJ)'s ruling in Budapest Bank was eagerly anticipated, following in the footsteps of other recent cases examining the conditions for EU antitrust authorities to establish "by object" infringements of antitrust rules (ie conduct which by its very nature has the potential to restrict competition). The judgment is important: while the ECJ applied the same key principles as in those previous rulings, including Cartes Bancaires, it also further challenges and develops certain aspects. Find out more in our alert, where we explain how the ECJ has raised the bar for EU antitrust authorities when dealing with conduct that is novel or atypical and that has pro-competitive effects, and how this could have an impact on cases involving multi-sided markets or platforms.
The related national proceedings are ongoing. A&O is acting for ING Bank.
Bolstered Hong Kong leniency programme designed to encourage cartel reporting by firms and individuals
Like many other antitrust authorities across the globe, the Hong Kong Competition Commission (HKCC) views its leniency programme as a vital means to detect, and then enforce against, cartel conduct. Hong Kong has had a leniency policy in place since 2015 when its Competition Ordinance (Ordinance) took effect. The HKCC has now issued a number of revisions to the policy which, together with the Cooperation and Settlement Policy published in April last year, is designed to give "stronger and clearer incentives" for reporting cartel conduct. As a result of these amendments:
- There is now a distinction between a "Type 1" leniency applicant (the first cartel member to disclose its participation in a cartel that the HKCC is not already investigating) and a "Type 2" leniency applicant (the first cartel member to provide substantial assistance to an existing HKCC investigation and enforcement action). Both will be immune from enforcement proceedings by the HKCC before the Competition Tribunal. This brings the programme in line with the leniency policies of many other jurisdictions, including the European Commission.
- Interestingly, for Type 2 leniency applicants only, the HKCC may issue an infringement notice in the event of a follow-on action for damages. The applicant would then be required to admit to a breach of the antitrust rules, enabling initiation of the follow-on action against them. Type 1 applicants are immune from such actions.
- Leniency is not available to firms that have been the ringleader of, or that have coerced other parties to engage in, a cartel.
In addition, the HKCC has introduced a new leniency policy for individuals, which contains similar protections and provisions as the corporate programme (albeit without the Type 1/Type 2 distinction). Notably, leniency is only available to individuals who report before the HKCC has granted a leniency marker to an undertaking. While the HKCC may bring proceedings against individuals for a pecuniary penalty pursuant to the Ordinance, this is the first time the HKCC has set out the principles and process for individuals.
The HKCC's efforts to clarify and strengthen the leniency programme for both companies and individuals are welcome. But some uncertainties remain. Determining whether a company/individual is a ringleader, for example, is rarely straightforward. And leniency agreements are technically reviewable by the Tribunal (although there is no precedent for such deals to be challenged). Overall, however, the revisions look set to meet their objective: to boost the number of leniency applications in Hong Kong going forward, particularly in light of the fact that the Competition Tribunal has just issued its first penalty decision – it has fined 10 decorating contractors for price fixing and market allocation, with the maximum fine of 10% of turnover reached in relation to seven of the firms found to be involved.
Merger control in Vietnam has been in a state of flux for a number of months. In July 2019 a new Competition Law came into force, which established a mandatory, suspensory regime for merger control approvals. But these rules did not contain the notification thresholds, and so the new regime could not be applied. At the end of March 2020, the long-awaited decree setting out those thresholds was issued by the Vietnamese Government, and will take effect on 15 May 2020. In our alert we explain how the regime will operate, and assess how its essential elements compare to those in other jurisdictions.
Thailand’s updated antitrust regime took effect in October 2017. The Thai Office of Trade Competition Commission (OTCC)’s first enforcement decision was reached nearly a year later in July 2018 – a fruit procurement and packaging company was found to have been unfairly abusing its bargaining power to the detriment of farmers and was ordered to stop, with a fine of up to THB6m (EUR170,000) and a daily fine of THB300,000 (EUR8,600) to be imposed if it failed to comply with the OTCC’s order.
Since then the OTCC has continued to ramp up enforcement activity. Most recently, in February 2020, it ordered Nissan to revoke the termination of seven dealership contracts following complaints from the dealers that Nissan had refused to renew without justification. Failure to comply with the OTCC’s orders will expose Nissan to a lump sum fine of up to THB6m and a daily fine of THB300,000 for the period of the breach.
Looking forward, the OTCC has a number of ongoing investigations, assessing conduct such as horizontal price-fixing, resale price maintenance, exclusivity issues and other possible abuses of dominance. It will be interesting to see the extent to which the OTCC imposes any direct fines in these cases (which can be up to 10% of turnover of the year of the offence and/or imprisonment) or whether it instead orders the firms involved to cease the infringing activities, which on balance seems to have been its preference so far. More broadly, we have seen reports that the OTCC is closely scrutinising the retail/wholesale, healthcare and ecommerce sectors for any indications of anti-competitive conduct. This all suggests that we can expect more enforcement action/decisions in the coming months.
After a seven-month review, the Australian Competition & Consumer Commission (ACCC) has decided not to oppose Asahi's AUD16bn (USD8.8bn) acquisition of Australia's largest brewer Carlton & United Breweries (CUB). The ACCC had concerns in two areas. In relation to cider, the ACCC found that the merged firm would account for over two-thirds of cider sales in Australia and would own the two largest cider brands. In beer, the authority concluded that while Asahi accounts for only a small share of Australian beer sales, the deal would have removed a rival capable of competing strongly against the two largest beer brewers, CUB and Lion, and a close competitor to CUB in the sale of premium international beers.
Asahi addressed the ACCC's concerns by undertaking to divest a total of five CUB brands in Australia: two beer brands (Stella Artois and Beck's) and three cider brands (including Strongbow). It has also committed to ensure that the divested brands get the same access to bars, pubs and clubs as well as off-premise space under tap-tying agreements as Asahi’s brands for the next three years. The ACCC will need to approve the future purchaser(s). The ACCC concern in relation to beer is indicative of increased ACCC scrutiny of even minor increments in concentration in markets that have a small number of large, established players. This concern was maintained by the ACCC even though there was strong evidence of new entry, innovation and rapid growth by numerous small (craft) brewers.
Allen & Overy is acting for Asahi.
The French Competition Authority (FCA) has put down a clear marker that it will hold companies to the commitments they make to it – whether in the context of an antitrust investigation or a merger review. This month it fined PMU, a company with a legal monopoly in France on horse-racing bets made in physical outlets, EUR900,000 for breaching commitments it made in 2014. PMU had agreed to the commitments – to separate the betting pools of stakes placed within its physical network from those made online – in order to place its competitors in the online market on an equal footing and to allow successful entry to the online market. Online betting had been open to competition in France since 2010, but the FCA found that PMU had been enjoying an unfair advantage over rivals as its ability to pool its online and offline bets allowed it to offer customers better odds and higher winnings online. A few years later, the FCA opened commitment enforcement proceedings when online rivals Betclic and Zeturf complained that PMU had continued to pool bets for international horse races taking place in South Africa, Ireland, the U.S., Norway and Sweden. The FCA agreed that, by combining bets placed online for foreign races into a common pool partnership between PMU and several foreign operators, PMU had not complied with its obligations and had been able to offer foreign races under the same attractive conditions that the 2014 commitments were intended to address.
Are such fines common? No, but the cases – both in France and elsewhere around the world – should not be ignored. In February the FCA fined a La Réunion funeral insurance company EUR200,000 for breaching 2009 antitrust commitments and, in March 2017, it fined Altice EUR40m for failing to meet part of the commitments the company made in 2014 to win merger control approval for its acquisition of SFR. The breach or non-fulfilment of commitments is punishable by a fine of up to 10% of the amount of the worldwide turnover excluding taxes of the company concerned. And this policing of commitments is in line with the global trend, detailed in our recent Global trends in merger control enforcement report, of strict enforcement of procedural merger control rules.
Conditional merger clearances in China show a focus on behavioural (FRAND) commitments in technology markets
In last month's edition of Antitrust in focus we reported on the State Administration for Market Regulation (SAMR)'s conditional clearance of the GE/Danaher merger. Since then, we have seen SAMR require remedies in relation to two further transactions in quick succession.
In early April, it found that the merger between Infineon and Cypress Semiconductor could eliminate or restrict competition in the global market for microcontroller units (MCUs) used in automobiles. In order to address its concerns, SAMR accepted a wide-ranging remedies package. The merged entity must not, for example, tie automotive-grade MCUs with other products (insulated gate bipolar transistors and NOR flash memory) in the Mainland Chinese market, must continue to sell these products separately to Mainland Chinese customers in the event it becomes possible in the future to integrate them into a single product, must ensure interoperability and must continue to supply Mainland Chinese customers with the products on fair, reasonable and non-discriminatory (FRAND) terms. Later in the month SAMR conditionally cleared Nvidia's acquisition of Mellanox. Its concerns in relation to this deal centred on the high market shares and strong bargaining power of Nvidia in the market for GPU accelerators and Mellanox in the market for high-speed network interconnection equipment. The remedies were similar to those in Infineon/Cypress – they included a commitment to provide Mainland Chinese customers with FRAND access to the products, to refrain from tying and bundling, exclusive dealing or discrimination, and to ensure interoperability.
The two decisions have a number of elements in common. First, they are both in the technology sector, which has been subject to close SAMR scrutiny in recent years, with semiconductors being a particular area of focus (in 2019 two of the five remedies cases in Mainland China were semiconductor mergers). Second, the remedies in each are behavioural in nature. This ties with a long-held preference for SAMR (and its predecessor MOFCOM) to require behavioural commitments rather than structural divestments to address concerns in anti-competitive mergers. Third, the remedies in both cases relate to FRAND access and, given a lack of guidance on what amounts to FRAND in this context, are generally challenging for the parties to implement and for SAMR and its trustee to monitor. And, finally, the parties to the two transactions are based outside Mainland China, showing SAMR's continued willingness to review and intervene in foreign-to-foreign transactions.
When it comes to the review of international mergers, antitrust authorities are increasingly co-ordinating their work. But this does not mean that results will always match up. National issues and concerns and differing review grounds and procedures can lead to diverging outcomes. This fact was most recently borne out in Sabre's proposed takeover of Farelogix. Both companies supply software solutions enabling airlines to create add-ons to tickets sold through travel agents, and offer services to help airlines connect with passengers via travel agents. In the U.S., concerned that the acquisition would eliminate a disruptive competitor, extinguish a crucial constraint on Sabre's market power, and result in higher prices and less innovation, the U.S. Department of Justice (DOJ) took the parties to federal court in Delaware to block the deal. Following an eight-day trial, the court held that the DOJ failed to meet its burden of proof that the parties competed in the same market, notwithstanding evidence that Sabre and Farelogix compete in direct connect solutions for major airlines. In line with prior precedent, including the U.S. Supreme Court's recent decision in Ohio v. American Express Co., the court concluded that Sabre, a two-sided platform that serves both airlines and travel agencies, only competes with other two-sided platforms. Farelogix, by contrast, has no commercial relationships with travel agencies. In its opinion clearing the transaction, the court admitted that this outcome may strike some as "somewhat odd" and conceded that on several points the DOJ was more persuasive than the merging parties due to a lack of credibility of several testifying Sabre and Farelogix executives. The DOJ has filed a notice of appeal with the Third Circuit.
Across the Atlantic, just two days later, the UK's Competition and Markets Authority (CMA) issued a prohibition decision. It had similar concerns to the DOJ, finding that in the UK the acquisition could result in increased fees for certain products and less innovation in services, leading to fewer new features that may be released more slowly. The CMA says "the evidence of harm is clear". And it rejected the remedies the parties offered – including to retain current pricing, service levels and investment for Farelogix products and making Farelogix technology available to any airlines wishing to use it. The CMA was clearly unperturbed by the U.S. ruling, noting that its job is to protect competition in the UK for the benefit of UK consumers. It also referenced Covid-19-related disruption to the travel industry, but did not soften its stance towards the merger: "[i]t remains important that we protect competition among businesses that provide services to airlines and the benefits such competition can bring for airlines and passengers". It will be interesting to see if the parties appeal: Sabre has voiced its criticism of the CMA's assessment throughout the investigation, and in particular the authority's grounds for taking jurisdiction.
Enforcing against antitrust infringements in the pharmaceuticals sector is an enforcement priority for China's State Administration for Market Regulation (SAMR). In fact, the Mainland Chinese Government's latest Five Year Plan expressly mentions that the improvement of supply mechanism of basic medicines should be a Government priority between 2016 and 2020. In the past five years, SAMR has concluded a number of enforcement cases against pharma companies (including four abuse of dominance cases), with a particular focus on active pharmaceutical ingredients (APIs) – especially those used for "basic medicines" that particularly concern the wellbeing of the general public. Most recently, SAMR has imposed penalties of RMB325.5m (approx. EUR42m) on three pharma companies for collective abuse of dominance in the market for calcium gluconate APIs for use in injections. According to SAMR the firms imposed unfairly high prices and unreasonable trading terms, eliminating and restricting market competition and harming consumer welfare.
As well as reinforcing SAMR's particular focus on APIs, this latest case is also important in several other respects:
- It shows SAMR's willingness to investigate suspected abuses of collective dominance. Investigations alleging that two or more firms have abused a collective position of dominance are generally relatively rare, let alone successful. In Mainland China, however, we have seen a number of similar cases, including another in the pharma sector at the end of 2018, where SAMR fined Hunan Er-Kang and Henan Jiushi a total of RMB10m (approx. EUR1.3m) for abusing their dominant position in the supply of APIs for an antihistamine.
- The case marks one of the highest recent fines imposed by SAMR for an infringement of the Antimonopoly Law. In particular, the fine on Shandong Kanghui (which SAMR found to have played a leading role in the conduct) hit the 10% turnover maximum.
- A significant proportion of the overall penalty on the companies comprised the confiscation of illegal gains – we have seen SAMR use its power to make this type of confiscation in a number of other antitrust cases.
- On top of the abuse of collective dominance finding, SAMR also found that two of the firms (Shandong Kanghui and Weifang Puyunhui) as well as 14 individuals obstructed its investigation by refusing to provide materials or information and by concealing, destroying and relocating evidence. The companies were each fined RMB1m (approx. EUR130,000), with the penalties for individuals ranging from RMB20,000 to RMB100,000. These fines fit with future legislative intention as indicated in the draft amendments to the Antimonopoly Law, tabled early this year, which propose to increase the sanctions SAMR can impose for obstruction. They are also in line with a more general trend for SAMR to strictly enforce procedural rules – in 2019, for example, it imposed a record number of fines for failure to notify a transaction under the merger control rules (see our Global trends in merger control enforcement report for more details).